Monday 05 Jun 2023
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(March 10): The US is working to close a loophole in restrictions imposed on Inspur Group that leaves American companies such as Intel Corp free to keep supplying the Chinese server maker’s affiliates.

The US Department of Commerce this month added Inspur and dozens of its peers to an export blacklist that already included major names from Huawei Technologies Co to AI giant Sensetime Group Inc and camera maker Hikvision. But it didn’t specify all of Inspur’s affiliates, of which there are dozens.

White House and Commerce officials are aware of the issue and working to close off the legal avenue they left open, according to people familiar with the matter. But until revised rules are published, suppliers such as Nvidia Corp and Cisco Systems Inc will remain free to deal with Inspur without getting permission from the US government. That may take several weeks, the people said, asking not to be identified discussing sensitive deliberations.

The loopholes are complicating Washington’s campaign to contain China’s tech sector, and spurring criticism over the ultimate efficacy of measures intended to cut off the flow of vital American technology. A spokesman for the Commerce Department declined to comment. A spokeswoman for the National Security Council also declined to comment. Representatives of Inspur didn’t immediately respond to requests for comment.

At the heart of the issue is Chinese enterprises’ penchant for complex networks of subsidiaries, often with opaque links to the parent corporation.

Inspur, a key partner to US companies from Cisco to IBM and Intel, directly owns shares in around 30 firms. Those cover a wide spectrum of businesses including hardware, artificial intelligence, cloud computing, investment, financial services and air transport, according to Tianyancha, a platform that tracks registration information. Some of the subsidiaries own dozens of units. Its joint venture with Cisco for example, is buried under three layers of companies.

Listed arm Inspur Electronic Information Industry Co fell its daily limit of 10% last Friday (March 3) after the US announced its latest Entity List additions, on top of losses of between 4% and 17% among several other group affiliates. Inspur Electronic alone has shed about a quarter of its value over the past week.

Inspur was among a number of companies added to the so-called Entity List last week for acquiring, or attempting to acquire, US-origin items in support of China’s military modernisation.

US restrictions typically require companies to seek a licence before exporting to named entities. The Commerce Department’s Bureau of Industry and Security has told applicants they should presume that those requests will be denied.

Once a state-owned electronics factory, Inspur is one of the country’s oldest information technology brands: Its transistors went into China’s first man-made satellite in 1970. The company has since blossomed into a server specialist and joined an informal club of Chinese national champions that include Huawei and chipmaker Semiconductor Manufacturing International Corp.

Inspur’s clout and market reach attracted a host of foreign companies that found it difficult to crack the Chinese market. It set up joint ventures with Cisco and IBM several years ago so that their products can more easily gain Chinese approvals and pass security checks — a common practice. In return, Inspur benefits from its US partners’ longer experience in dealing with international markets.

It’s unclear how long Washington has kept an eye on Inspur. The Pentagon said in 2020 that it’s a company controlled by China’s military. Inspur, which also provides cloud services, is regarded as integral to the government’s effort to replace foreign-made technology and propel domestic innovation.

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